Advanced Micro · intermediate
What moves on the Consumer Theory (Indifference Curves) diagram
A higher price of X pivots the budget line in around the Y-intercept, combining a substitution effect away from X with a negative income effect.
You start at your optimal bundle, trading off the two goods at market prices.
The price of good X jumps. Your income buys as much Y as before, but much less X.
The budget line pivots inward around the Y-axis intercept.
You substitute away from X and end on a lower indifference curve: the price rise made you poorer in realrealAdjusted for inflation, measured in actual purchasing power. terms.
Examiners ask this as: price spike, price doubles, inflation on one good, expensive habit, price increase good x.
Other scenarios on Consumer Theory (Indifference Curves)